Remember when scams were just some lonely Nigerian
Prince looking to toss you some cash?
All they really wanted was friendship...
and your Social Security number.
Scam used to be so simple, so pure.
Just give me some money.
No extra steps needed.
But today's scams are complicated.
It's tough to even know know what
constitutes a scam or a Ponzi.
With the latest $40 billion crash of the cryptocurrencies
Luna and UST, there have been a whirlwind of
comments calling the project an outright Ponzi.
But is it really?
I feel like I intuitively know what a Ponzi is.
Some entity collecting money from new investors to
pay out old investors until the money runs
dry and then the whole thing falls apart.
However, by that logic, wouldn't gold be a Ponzi?
Let's think about it.
Gold doesn't produce any value.
Like buying gold doesn't pay you any cash.
And because of this, investors only make money when they
sell gold to a new investor at a higher price.
By that logic, it kind of sounds like a Ponzi.
But that can't be right. I mean, gold is useful.
We put it in electronics, and it's scarce.
The world only has so much.
What about Social Security retirement?
This one is controversial.
In the US, Social Security is a system
that uses current workforce wages in order to
pay the current retired workforce's income.
This system is betting that workers will
continue to pay retirees and that this
will just keep working through the generations.
Is that just a more complicated version
of new investors paying old within a
system where no profits are generated?
Then we have crypto projects like
the failed Luna and UST.
It looks similar.
New investors paying old, prices higher
and higher until the music stops.
The answer to all this is far more complicated
and fascinating than I would have ever expected.
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Back to the video.
In researching this, I needed to
first understand what is a Ponzi.
I mean, I can't find a straight answer anywhere,
so I need to build a Ponzi checklist.
So I decided to start at the beginning.
Let me tell you about the
first recorded scam in history.
It was done by a fellow named Hegestratos in 300 BC.
He was a sailor who took out
an insurance policy on his ship.
Yeah, they had insurance back then, weird enough.
The policy was actually called a bottomry,
which sounds like another word for a
diarrhea, but we're getting off track here.
So his idea was to drown his crew and pretend to
sink the ship in order to collect insurance money on it.
Well, his crew found out and he ended up
jumping off his boat only to drown himself. The end.
As ridiculous as this story is,
it helped answer one thing.
All ponzies are scams, but not all scams are ponzies.
Hegestratos was promising no investor return.
So a couple of thousand years go by
and scammers start getting better at scamming.
And in 1903, a young man emigrated to the US,
arriving with just a few dollars in his pocket.
But he wasn't your run-of-the-mill street criminal.
He had a good understanding of arbitrage and
he came up with this fascinating offer that
looked like the opportunity of a lifetime.
He promised investors 50% to 100% profits in his business
of buying postal reply coupons in other countries and then
redeeming them for full value in the US.
And it seems somewhat believable, this guy was buying coupons
for a few cents and selling them for like $0.25.
Except plot twist, he didn't actually
do any buying and selling.
Instead he just took new investor
money and paid out old investors.
Word spread like wildfire of the fantastic returns
this young, brilliant man could get you.
And he ended up scamming $20 million
in a year before the scheme collapsed.
That's $271 million in today's money.
And you might be thinking, Jesus, how
haven't I heard of this guy before? What's his name?
Well, his name was Charles.
Charles Ponzi.
Seriously, building our Ponzi checklist, we can
definitively say a scam must pay old
investors with new investor money.
And Ponzi schemes are insolvent.
There's never enough money in the
system to pay off everyone.
Now we need to fast forward to the
largest and most successful Ponzi in history.
This $64 billion scam spanned several decades and
happened right under the nose of regulators. But how?
Well, the man in charge,
Bernie Madoff, had serious pull.
He owned the fourth largest market maker, he helped launch
the Nasdaq, and he was an adviser to the SEC.
He was extremely well respected and almost feared.
How his scam worked was he'd take investor money with
the advertisement that he was investing in something called
a split strike conversion, which is basically just an
options contract on big companies.
But they needed to be able to
show all this fake trading activity.
This is what happened on the 17th floor.
So when an investor asked for trading records,
they would create this backdating trading report on
the secret floor of his building.
Coca Cola did well last week.
Let's say we invested in that.
In reality, he simply took investor money and
deposited into a bank account, only to pay
out new investors with that same money.
The whole thing came crashing down in 2008 when
investors were requesting more than $7 billion back.
He didn't have the money and
his two sons turned him in.
Bernie was sentenced to 150 years in prison.
So what can we add to our Ponzi checklist?
First, Ponzi will typically
discourage withdrawals of money.
Some will even have penalties.
Ponzi generally want your pullout game
to be as weak as possible.
And second, a promise of outsized returns.
A Ponzi will promise returns above
what you can get elsewhere.
Otherwise, there's no incentive to invest.
And third, a Ponzi promises to be
a real business with real returns.
However, in reality, the scam just keeps cash
in order to be as liquid as possible.
There's one final Ponzi I had to
look into before concluding my research.
2021, Gina Champion.
She was the socialite and restaurant entrepreneur
with many businesses in San Diego.
She had a ton of respect in the
community, just kept expanding and expanding her businesses.
But she had a little side project going on.
A project that used the exact
same tactics as Ponzi and Madoff.
She created this service that would lend money to
California businesses looking to get liquor licenses where the
cost would be upwards of $100,000.
Investors jumped at the opportunity to supply the short
term high interest loans, but Gina had a secret.
The deposit for the license was no
more than 10% of that amount.
This meant the bulk of the money was
funneled into other businesses that Gina controlled, which
she then used to pay back all investors.
Like every Ponzi before it, this one came crashing
down to reveal a nearly $400 million dollar scam.
Maybe one red flag here was that she
seemed to have these obsessive traits and blind
optimism that things would just work out.
Adding to our Ponzi checklist, we
can see that Ponzi are voluntary.
There's no one forcing you to invest.
It just seems like this great
opportunity that happens upon your lap.
Second, Ponzi are illegal schemes.
And third, these schemes typically seem to have this
single cult like leader with a large ego.
These leaders tend to be blinded by the
massive ego, making it hard to realize that
things can and will go wrong.
So we have our checklist criteria in place.
But I felt some reordering
was needed into two categories.
A section of must haves to be a Ponzi and
a section of indicators things that might be a Ponzi.
So let's go back to our original questions.
Is Gold a Ponzi?
If I use the checklist, I can really
only check two boxes with certainty and one
is borderline depending on who you talk to.
What about Social Security?
Is the whole system just one big scam destined to fail?
Using the checklist, I can
realistically check just one box.
Yes, the current workers pay for old workers.
However, they do make a profit in
which they invest into themselves and government bonds,
which is a whole different issue.
The government angle here is weird because if this
wasn't a government, it would wreak up Ponzi. But it is.
And because governments are trusted institutions, they
can do things that would make you
scratch your head anywhere else.
Now, what about Luna and UST? Was it a Ponzi?
Do they pay old investors with new investor money?
Arguably, yes.
The value of the Terra ecosystem is investor money.
Even the LFG reserves the money backing
the system was built on Luna token
deposits made valuable by investors.
Okay, so what about their debts?
Can they pay them back?
On the one hand, obviously they can't.
The whole system collapsed because of that.
But on the other hand, it wasn't always that way.
There was a point when they had
enough money in the system backing everything.
However, the system relied too heavily
on investor money, so it collapsed.
What about the promise of outsized returns?
Yes, they did.
Nearly 20% APY was absolutely
above the industry standard.
Now, in their defense, this was meant
to be an introductory rate, like literally
every other platform does to attract users.
But we still need to check that box.
Is it voluntary to invest? Yes.
Does it use an illegal scheme?
No ?
Under current regulations, there's a
lot of Gray area here.
However, after this whole debacle, I would
not be surprised if that completely changes
with new laws and investor protections.
What I realized in this research is
we could have something that checks every
single box except the illegal one.
And if it doesn't check that box, you can't
really say this without a doubt is a Ponzi.
There just has to be that illegal element.
All right, next, discouraging withdrawals.
I would argue no, since you could remove funds
at any time promises to be a real business, but isn't.
This one I sat and thought on for a while.
On the one hand, you could argue no, this
isn't legit, since the system is based on and
paid for by investor money, but so is gold.
On the other hand, they did have loan services that
acted like a real business and generated real returns.
The issue was this part of the
business didn't make up for total losses.
And finally, a cult like
leader with questionable judgment.
I'll let you decide yourself on this one.
- How many of these companies do you think are
entering the space just because it's hot and there's
a lot of funding versus the ones that will
still be here, like two to five years later?
- 95% are going to die.
95% are going to die.
There's also entertainment to watch
the customers die, too.
So is Luna and UST a giant Ponzi?
I would argue yes, but also no.
What are your thoughts on this?
I've realized in my research
that Ponzis are a continuum.
Something that checks every single box is 100%
a Ponzi that should be taken down.
But something could check five out of eight feel like
a Ponzi, but not really be in a legal scheme.
And to be honest, if we take out the
criteria of a Ponzi needing to be illegal, nearly
every system that requires trust and doesn't produce cash
is some degree of a Ponzi.
Not just gold and Social Security
but also the US dollar, government-backed
bonds, bank account, interest, coals, cash.
Our entire monetary system is built on
trust and if trust runs out, the
entire system collapses just like a Ponzi.
What I learned is Ponzis are a
spectrum and context is everything here.
Checking a couple of boxes isn't the end
of the world but the more boxes checked
I'm Max Maher and I hope you have a profitable day!